TEXT-Fitch Affirms Chunghwa Telecom; Withdraw Ratings

Tue Oct 23, 2012 2:02am EDT

(The following was released by the rating agency)

HONG KONG/SEOUL, October 23 (Fitch) Fitch Ratings has affirmed Taiwan-based Chunghwa Telecom Co., Ltd's (CHT): Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'AA-'. The agency has also affirmed CHT's National Long-Term Rating at 'AAA(twn)'. The Outlooks are Stable. The agency has simultaneously withdrawn all the ratings.

The ratings have been withdrawn as they are no longer considered by Fitch to be relevant to the agency's coverage. Fitch will no longer provide rating or analytical coverage of this issuer.

The ratings reflect CHT's continued leadership in Taiwan's telecom market with solid cash flow generation and strong financial flexibility. Although CHT's operating EBITDAR margin and post-dividend free cash flow (FCF) are likely to deteriorate in 2012, Fitch expects the company's medium-term credit profile to remain compatible with the current rating level. CHT remains the largest integrated telecom operator in Taiwan, with revenues accounting for around half of Taiwan's telecoms service market. The company enjoys leading positions in local and international telephony, mobile, broadband access and internet services. In subscriber market share terms, CHT controlled 95.1%, 34.8% and 79.7% of local fixed-line, mobile and broadband access services, respectively, at end-June 2012.

CHT recorded steady revenue growth in 2011 and H112, driven by higher mobile data revenue and smartphone sales. However, its operating EBITDAR margin has deteriorated due to tariff cuts, higher cost of handsets sold, including those from its subsidiary Senao, as well as growth in the lower-margin corporate solution and information and communication technology business. Fitch expects CHT's operating EBITDAR margin to fall below 40% and post-dividend FCF to turn negative in 2012. Fitch believes that the sub-40% operating EBITDAR margins and a single year of negative FCF will not lead to a change in CHT's credit profile over the medium term due to its strong net cash position and solid cash flow from operations. CHT had net cash in excess of TWD65.5bn at end-2011. In addition, the company has the lowest funds flow from operations (FFO)-adjusted leverage among major peers in Asia-Pacific.

Fitch believes that CHT's leading market position will help underpin its large net cash position. The agency expects CHT's FFO-adjusted gross leverage to be 0.2x (2011:0.04x) and FFO-adjusted net leverage to be -0.5x in 2012.

Fitch expects CHT's post-dividend FCF to turn positive in 2013 and thereafter; CHT's stated policy is to primarily rely on cash flow from operations and, to a lesser extent, loans from commercial banks to fund capital expenditure, make dividend payments, repay debts and fulfil other commitments.

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